The Ninth Circuit recently upheld a jury verdict against Maxim Integrated Products Inc.’s former CFO, Carl Jasper, for various fraudulent interstate transactions resulting from stock option backdating. In so doing, the court’s most significant holding was to uphold jury instructions regarding the Jasper’s more than 150 Fifth Amendment invocations.
As background, firms can grant “in the money” options (exercise price is less than the market price), “at the money” (exercise price is equal to the market price), or “out of the money” (the exercise price is greater than the market price). For accounting purposes, companies must book as an expense the value of “in the money” options. They need not do so with “at the money” or “out of the money” options. For tax purposes, a firm may not deduct from its tax liability the value of “in the money” options granted to an employee whose compensation is greater than $1 million. However, firms may deduct the value of “at the money” options. Backdating is when a firm writes an “at the money” option dated as of a certain day in the past when the stock price was lower. Thus, technically, the employee has an “in the money” option (because it can be immediately exercised for a profit), while the firm tracks the option as “at the money” for accounting and tax purposes.
While this practice is legally permissible, it can present civil and criminal liability when a firm overstates its profits and misleads investors. According to the court, from 2000-2005, Maxim overstated its income by $838.3 million, $515 million of which was the result of additional expenses “incurred as a result of stock-based compensation.” The court upheld the jury verdict that Jasper violated SEC Rule 10b-5 by participating in a “scheme to over-state Maxim’s net income,” and that he violated various subsections of 15 U.S.C. § 78(m) by aiding and abetting Maxim’s failure to maintain accurate records.
During the jury trial, the district court permitted the SEC to introduce as evidence a video tape of Jasper repeatedly invoking the Fifth Amendment and thereby “allowed the SEC to introduce written discovery responses” despite Jasper’s attempt to invoke his Fifth Amendment rights 150 times. Jasper argued on appeal that the district court abused its discretion by failing to scrutinize the admissibility of each invocation on a question-by-question basis. However, Ninth Circuit rejected that argument and held that it was within the district court’s discretion to review and admit them all into evidence as a group because: 1) these invocations were presented to and dealt with by the district court at a high level of generality and 2) Jasper “united his invocations into identified groupings of questions.”